Australian Dollar remains subdued despite RBA rate hike

AUD/USD holds losses for the second consecutive day, hovering around 0.7160 during the Asian hours on Tuesday. The Australian Dollar (AUD) moves little following the release of the Reserve Bank of Australia’s (RBA) policy decision.

The RBA hiked the Official Cash Rate (OCR) by 25 basis points (bps) to 4.35% from 4.10% after concluding its May monetary policy meeting. The decision aligned with the market expectations. The decision was passed by a majority, with eight members backing a 25 bps hike to 4.35%, while one voted to keep rates at 4.10%.

RBA Monetary Policy Statement indicated that inflation rose materially in H2 2025, and information since the beginning of this year confirms that some of this increase was driven by capacity pressures. Additionally, the conflict in the Middle East has resulted in sharply higher fuel and related commodity prices, which are already adding to inflation. Firms are passing on costs through price hikes, while short-term inflation expectations have also moved higher.

The AUD/USD pair depreciates as the US Dollar (USD) strengthens on safe-haven demand following Iran’s attack on the United Arab Emirates (UAE). CNBC reported Monday that the UAE was targeted by Iranian drones and missiles, while the US said it destroyed Iranian boats in the Strait of Hormuz. US President Donald Trump warned that Iran would be “blown off the face of the earth” if it targets US ships protecting commercial vessels passing through the Hormuz.

The Greenback strengthens as Treasury yields rise alongside expectations that the Federal Reserve (Fed) may need to lift interest rates to curb inflation. Minneapolis Fed President Neel Kashkari said Sunday that additional rate hikes cannot be ruled out, especially as inflation risks remain elevated due to higher energy prices linked to the Iran conflict.